Fully Depreciated Assets

We at Telikom PNG Limited are also using SAP to account for our fixed assets. What is the best practice to deal with the zero book value assets or fully depreciated assets. We understand that we have to dispose/scrap the assets, however we have some assets which are fully depreciated and are not physically available. Please advise accordingly.

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You don't have to "dispose/scrap" an asset just because it's completely depreciated. If it's still on-hand, you should leave it on your books with NBV = 0. This enables you to use the asset master functionality to track it's location. As for the assets that are "not physically available"; those are the ones you should retire.

As David explained, you don't have to retire the asset unless it is really retired. Otherwise you will want to keep the asset active with NBV = 0 and record gain at the time of sale of this 0 NBV asset.

Just beware there is an accounting requirement to continually reassess fixed assets' estimate of service life. If assets are still in service with net zero book value, then depreciation was too fast. The estimate of service life duration was too short, and should have been lengthened before book value hit zero. Correcting an error in an estimate only requires prospective reporting recognition (footnote in year of change explaining result of changed estimate) if a material impact on depreciation is made. No restatements required - a good thing.

To what requirement are you referring? I made the move from accounting (where I did Fixed Assets) 10 years ago. Your post aroused my curiosity, but some quick research reinforced my initial reaction: If we're talking about basic, declining value (i.e. not appreciating) assets, then

- Depreciation terms are statutory and are based on asset classification.
- If you can still use it when it's NBV is zero, there should be no bearing on value unless you sink money into refurbishment and thereby significantly increase the asset's value at which point the refurbishment cost would be the new depreciate base.
- The other adjustment would be to write the value down if it's usefulness or ROI were overestimated and the result is an overstated balance sheet.

Not saying you're incorrect. Just looking for a citation in the code. Particularly because I, like you, am US based.

I suggest that you look up the IFRS - IAS 16 and IAS 36 are the relevant statements. You can read them at iasplus.com. These will guide you as to the correct treatment of assets.

My personal opinion based on over 40 years of international accounting experience is that assets that are no longer used and are fully depreciated should be retired by scrapping. If you can sell them for any price at all, recognize that as revenue. If the assets are fully depreciated and are still in use consider giving them a residual value of 1 (in whatever currency you use) so that they stay on the books and do not depreciate but are not lost from view. If they still have a significant value to the business and you find that they were depreciated too fast, you can revalue and write them up and depreciate the new value over the estimated remaining useful life. For this I would recommend taking appropriate professional advice to be able to justify the new value on the basis of experts' reports, both to auditors and to shareholders and other users of financial statements. The thinking behind revaluation is twofold. One view is that it generates unrealized "profit" by recognizing plus values that may or may not exist. Another view is that it helps to protect against hostile takeovers by putting the real value of the company into the balance sheet. Therefore revaluations should be considered in a very hard light to ensure that they are justifiable and represent true values and not just vague estimates by management.

If your policies permit you can dispose off the assets in SAP. You already
mentioned that the asset is not physically available... So you can dispose
off the asset without revenue through transaction code ABAVN

So, for the benefit of a casual reader who won't check the references, from IAS 16:

"Measurement after recognition: An entity shall choose either the cost model or the revaluation model as its accounting policy and shall apply that policy to an entire class of property, plant and equipment."

Therefore the treatment referenced is optional, although it must be applied uniformly for the asset class.

Thank you David for your points. The requirement I am thinking of is the basic matching principle, whereas revenues should be matched with the expenses that generated said revenues. If depreciation is finished before the revenues generated from the assets are no more (considering the questions of materiality and certainly the good points made by Roy as well) then the matching principle is not upheld. Several estimates are necessary in accounting, to the extent that estimates in general are mentioned in the audit opinion letters. The most common example of estimate might be asset service life duration. Sorry to side-track from original question how to get rid of assets no longer physically there or in use still. Please read Roy's answer if you did not already. Thank you.

The IFRS policy states that fixed assets with a zero value must be taken off the Asset Register,
but if the asset is still in use then the asset must be revalued where a value is attached to it and
you will now start depreciating the asset. This is standard general accepted accounting practice
and not only a SAP function. If the asset is given a new value then there is no need to scrap the
asset but to post an acquisition to this asset which will give it a new base for depreciation. I hope
this helps you.

We at Telikom PNG Limited are also using SAP to account for our fixed assets. What is the best practice to deal with the zero book value assets or fully depreciated assets. We understand that we have to dispose/scrap the assets, however we have some assets which are fully depreciated and are not physically available. Please advise accordingly.

The IFRS policy states that fixed assets with a zero value must be taken off the Asset Register,
but if the asset is still in use then the asset must be revalued where a value is attached to it and
you will now start depreciating the asset. This is standard general accepted accounting practice
and not only a SAP function. If the asset is given a new value then there is no need to scrap the
asset but to post an acquisition to this asset which will give it a new base for depreciation. I hope
this helps you.

We at Telikom PNG Limited are also using SAP to account for our fixed assets. What is the best practice to deal with the zero book value assets or fully depreciated assets. We understand that we have to dispose/scrap the assets, however we have some assets which are fully depreciated and are not physically available. Please advise accordingly.

"The estimate of service life duration was too short, and should have been lengthened before book value hit zero".
What are the accounting entries that need to be passed to lengthen the service life duration?

Lengthening the service life will have the effect of reversing excessive depreciation recognized previously. Some allowed methods are faster than others, however the organization is expected to pick the one that comes close to actual reduction rate of service utility through the years. (This is very unlike the rules for statutory income tax depreciation rates, where very fast reduction is allowed to spur the economy or to meet other national objectives. So be sure to do this only in your financial depreciation areas, not also in your income tax depreciation areas IF those are derived in SAP).

Cr expense
Dr accumulated depreciation

If the amount is material, do not restate prior years if US GAAP - but put an explanatory comment in the Notes to the Financial Statements. There is a particular note devoted to fixed assets, depreciation, asset roll forward, service life estimate ranges for each asset class. I am speaking here of US GAAP, but I imagine IFRS and other comprehensive rules have a similar note required for fixed assets. If the amount is not a material amount, no note required.

Thank you all for your helpful advises.
All points are valid as they put me in a better position to understand how to treat the asset which are 'not physically available and have a zero net book value'.
Regards,
Patrick NAMBORE

You should scrap the asset with 0 book value as long as it is according to your company's accounting policies as the IFRS policy says that if you want to keep an asset with zero book value on your asset register, then it must be revalued and start the depreciation process again, as assets with nil book values must be scrapped and taken off your asset register. I hope this answers your question.